Sugar sector: speed up the process of deregulation

Of late, price politics, input subsidies and support to farmers’ incomes are the most discussed topics on agricultural policies. These policies have been deployed by various countries to protect their domestic sectors, and the sugar sector is a perfect example of it. Usually, these policies have led to inefficient and relatively less competitive world market. Sugar is known to be one of the most distorted commodities because of subsidies and other policies that manipulate the market.

India has been witnessing one of the worst episodes of agrarian distress during the last few years, and sugarcane farmers were majorly hit by this. The failure of monsoon and loan burdens are the most cited reasons behind agrarian distress and farmer suicides. But critical analysis reveals that the type of government intervention in the sugar sector is also a key reason for the distress among farmers in sugarcane belts. The sugar sector is highly politicised, closely monitored by the government, and has witnessed a number of changes in policies related to domestic support and international trade.

Under the structured Industrial Development Policy, the sugar industry was part of the Five-Year Plans introduced in 1951 and has been under the control of the government ever since. Government intervention has always been protective of this industry, covering almost all its aspects — from licensing, capacity, cane area, procurement, pricing, sugar pricing to distribution, imports and exports. Overall, government policies have resulted in impressive outcomes in this sector and its by-product has become a mainstay of the alcohol industry. It also generates surplus energy to meet the increasing energy demand in India.

The major policy regimes operating in the sugar sector are:

Pricing policy: According to the Sugarcane Control Order, 1966, the central government fixes the minimum price for sugarcane (Statutory Minimum Price) that must be paid by producers of sugar for the sugarcane purchased from farmers. This price was to be fixed after consultation with the CACP, which included cost of production, recovery rate of sugarcane, the general trend of other agricultural prices in the market, availability of sugar at a fair price to consumers, and the open market price of sugar.

However, some states announce State Advised Price (SAP), which is usually higher than SMP. The reasons behind states announcing the SAP are differences in the cost of production from one region to another, productivity levels, and also the result of pressure from farmers’ groups. It is also argued that SMP merely covered the cost of cultivation without giving scope for sufficient profit to farmers.

Subsidies: These are assumed to be the most distorting measures in the world sugar market. There are several forms in which government subsidises the sugar sector in India. High regulation at each stage of the value chain compel the State to provide subsidies to different stakeholders of the sector at respective stages. For instance, farmers are subsidised through input subsidies (fertiliser subsidy, subsidy on drip irrigation and subsidy on machinery), credit at low interest rate, free extension services and so on. Millers are subsidised through soft credit loans and export subsidies.

Trade policies: India has substantially protected the domestic market from the external forces. There are various types of trade-related regulations that India has deployed, like minimum indicative export quotas and high import tariffs.

Deregulation

Most of the committees formed to study the sugar sector have reported that the unending woes of the sugar industry indicate a classic case of failure resulting from government intervention and over-regulation. For many years, the sugar industry was controlled by both states and the Centre through regulating the sugarcane price procured by sugar mills, by placing ceilings on the monthly release of sugar by mills to the open market, by imposing levy sugar policy, and so on. Such policies of complete control over a sector were more apt for the pre-liberalisation period but after liberalisation these kinds of policies seem out of place. Therefore, there has been a long-pending demand for decontrolling the sugar industry completely so that the industry could grow in a free market environment.

One of the major steps to decontrol the sugar sector was taken in 1998 when the A B Vajpayee government abolished the licensing policy for new sugar mills. The UPA government took it forward in 2012 and partially deregulated the sector based on the recommendations of the C Rangarajan committee report. Among various recommendations made by this committee in 2011, the government relaxed some regulations, like abolishing the 10% levy sugar and restrictions on monthly release of sugar to open market, ending export and import quotas and some package restrictions. It’s been four years since partial deregulation of the sugar industry took place, and it has impacted the sector in several ways.

The protective policies in the sugar sector are not helping any stakeholder, especially not the farmers and millers. The partial decontrol of the industry also did not rescue the industry from its predicament. The main reason behind the crisis is that there is a mismatch between the sugarcane and sugar prices. Sugar prices have been constant over the period and cost of production is increasing. As many studies have revealed, the increase in sugar price is less impactful on the monthly expenditure of the lower class household, so removing the cap on sugar prices would be a good option.

Reviving sugar mills, especially co-operatives, is another area that the government should focus on. Taking co-operative sugar mills out of the hold of politicians and rich farmers and making its board of management and membership more inclusive to all sections of the farming community are also vital at this stage. More encouragement to programmes like ethanol blending will serve the dual purpose of helping the sugar industry to do better business and also contribute to a cleaner environment.

(The writer is a PhD scholar, Institute for Social and Economic Change, Bengaluru)